Showing posts with label Australian economy. Show all posts
Showing posts with label Australian economy. Show all posts

Thursday, September 1, 2011

Improving the house price and income debate

While the RBA has warned of the risks of leveraging into the housing market on national television, they, and other analysts, have also presented a stable picture of the housing market, by estimating a house price to household income ratio of about 4x, and accompanying such analysis with statements like the ratio of housing prices to income has been reasonably flat for a number of years

Or, when he is at his best, Glenn Stevens can calm the nerves of recent home buyers with comments like this -

The other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio it about 4 ½ and it hasn’t moved much either way for 10 years.

I think I can safely say that most of Australia would disagree with this assessment of stability in the housing market or support from economic 'fundamentals'. Indeed even the RBA's own representations seem a little schizophrenic on the subject, with a recent report noting that the price-to-income ratio actually increased by 50% between 2001 and 2004.

Dwelling price growth significantly outpaced growth in household disposable income, with the nationwide dwelling price-to-income ratio rising from around 2½ in the mid 1990s to a little over 3 by 2001 and then to 4½ at its peak in early 2004.

Which is it Glenn? Did the ratio increase by 50% in that period, or hasn't it moved much either way for ten years?

One reason for the clash between public views on housing and the 'stability stance' we see out of the RBA is that the RBA grossly overestimates household incomes.

I have examined the data used by the RBA and other analysts from the National Accounts (Table 14), and tried to replicate their method and reconcile the differences with ABS household survey data, which more accurately reflects household income available for current consumption. It is possible, and I have shown my results in shown in the table below.


ABS household survey data shows that at the beginning of 2010, the average household income was $88,113 before tax and $74,360 after tax. This closely reconciles with my own household income estimates from the National Accounts data in 2010 (within 1.3%). Unfortunately due to the need to estimate the total number of households between census years, this method has quite a large margin for error.

Given the average national dwelling price at that time was $447,994 and the median about $415,000, we are definitely in an uncomfortable range of price-to-income ratios, with 5.0x in average terms using before tax income data, and around 6.0x in after tax terms. In terms of median incomes and dwelling prices, the ratio is probably closer to 5.6x before tax, and 6.8x in after tax income (as recently estimated by fellow blogger Leith van Onselen).

This happens to match the data produced by Rismark (here), after they revised their average price-to-income ratio up after noting the discrepancies in the unadjusted National Accounts data.

While I don’t believe household income and house price comparisons are the best indicator of the state of the housing market (preferring comparisons of rents to incomes and yields to other rates of return in the economy), it does seem that we can use the national accounts data to give a decent regular estimate of household incomes for those who wish to use them for analysis.  Maybe the RBA should try it sometime.

Also important to note when comparing incomes to prices is that the debt service ratio, measured as interest payment against incomes, can be misleading.  Since this measure is also published by the RBA, I assume they rely upon it in some way. 

Below is the household finances graph from the RBA chart pack (available here). We can see that, following the declines in interest rates at the end of 2008, household interest payments have settled at around 12% of disposable income. Note again that the RBA disposable income measure is probably overestimated (there is no specific note about the treatment of imputed rents), meaning the both measures are probably underestimated. But in any case the trends over time still hold.


What we need to consider here is that the interest paid graph shows what might be called a 'debt-service' ratio (although not in the true sense which would cover principle repayments). In regard to the surging household debt the RBA notes that the ...structural decline in interest rates has facilitated the increase in household debt ratios because it reduced debt-servicing costs.

That is true, but would only explain an increase in debt that accompanied flat interest payments as a proportion of income, not increasing interest payments (as I have explain in detail here).

What is also overlooked is that at lower interest rates the difference between the payment of just the interest on debt, and the repayment of interest and principle (to actually reduce the loan balance over a fixed period), greatly increases. For the same interest payment, a high debt balance with a low interest rate is more difficult to repay than a low debt balance with a high interest rate.

The table below shows the amount of debt that a household with an income of $75,000 could service with 20% of their income ($15,000pa) at different interest rates. While a halving of interest rates means the household could double the loan amount and pay the same interest payment, the loan they could actually repay over 30 years increases by far less (as shown in the right hand column).


It is also important to understand this relationship when comparing our household debt burden internationally. The RBA usually makes such comparisons without noting the importance that interest rates make to the burden of this debt on households. Given that mortgage rates vary between 7.5% in Australia to 2.5% in Switzerland and 3% in Germany and much of the EU (and noting the tax deductibility of mortgage interest in Netherlands), these differences are important. 

I will finish this analysis by presenting three graphs. 

First is a graph of the household occupancy rate. The reason to include this is that while household incomes may be still growing nicely, the number of people per dwelling has been increasing since late 2005, so in per capita terms incomes are not looking as good.
The second graph shows the contributions of insurance premiums and claims to household income (which I removed in my income estimation method). When this number is positive it means that household insurance claims were more that the premiums paid in that period. That’s why we see a massive spike in February 2011 from the claims relating to floods and cyclone Yasi (and amongst other things, the Black Saturday Bushfires in early 2009 – note the data is very cyclical with a summer peak). It seems odd to have either the insurance premiums or claims in estimates of household income (although makes up just a fraction of a percent of the total).


The third and final graph compares the growth in household incomes using each method with the ABS capital city price index. Of course, I have chosen an arbitrary baseline at June 2001, but I do note that mortgage interest rates then were the same then as they are now (indeed mortgage rates were about the same as now back in 1997 - see here), so the deviation observed could easily be interpreted as an overvaluation of housing.


What the graph mostly tells us is that there is a pretty solid reason so many people believe that house prices are historically high and are more likely to fall than rise in the near future, being supported only be our willingness to incur debt, and not our incomes. 

Wednesday, August 31, 2011

Using quarantine as a barrier to trade


I have been meaning to write about using quarantine as a barrier to trade since Queensland’s banana crop was destroyed by cyclone Yasi last summer and prices at the supermarket shelf hit $14/kilo and more. It seems that leading economist Saul Eslake, and economist turned politician Andrew Leigh, have done the job of deciphering genuine concerns over importing disease, and rent seeking by protected producers.

Let us start with what Andrew had to say.

In fact, just about every trade barrier can be rewritten as a quarantine rule or a consumer protection law. Suppose Californian wine producers are complaining about competition from French Bordeaux. Left unchecked, US authorities could simply raise health concerns about Phylloxera, and ban French wines on quarantine grounds. Or imagine that British carmakers are struggling to compete with Malaysian hatchbacks. Without any international guidelines, there would be nothing to stop the UK from banning Malaysian small cars for reasons of safety.

To prevent competition laws and environmental rules from being used as backdoor protectionism, the WTO has two new treaties that require health, consumer and environmental regulations to be scientifically based. National regulations cannot discriminate against particular countries, and must not impede trade any more than necessary.

If a WTO member thinks that another country is breaking the global trade rules, it can take a case to the dispute panel. Australia has complained to the WTO on seven occasions (against the European Union, Hungary, India, Korea, and the United States). We’ve won five of these cases, including decisions in favour of our beef exporters to Korea and our lamb exporters to the US.

On the flipside, we’ve had ten cases brought against us (by Canada, the EU, New Zealand, the Philippines, Switzerland, and the US). We’ve lost three of these cases, including the New Zealand apples decision (the other two losses related to imports of salmon and automotive leather).

Andrew makes the solid points that quarantine and consumer protection is ‘back-door’ protectionism, and gives a good overview of the international legal framework around trade.

Saul Eslake takes different approach by discussing the price impacts on domestic consumers from this type of protection. He also highlighted that in the wake of cyclone Yasi, high banana prices were only helping banana growers whose crops weren’t destroyed, not those who actually lost their crops from the cyclone.

On the matter of importing diseases, he makes a point I have argued to many people in the past. How would diseases go from boxed-up fruit and vegetables arriving in city ports out to farms? How high is that risk? In Eslake’s words-

If bananas and other fruit or vegetables are imported into southern ports, such as Melbourne, Adelaide or Sydney, and are subject upon arrival to appropriate inspections, they are no more likely to spread diseases damaging to Australia's banana industry than the importation of cooked and packaged Canadian salmon has done to Tasmania's salmon industry (another example of protectionism masquerading as ''biosecurity'' where, unusually, commonsense and the interests of consumers ultimately prevailed).

To me the irony of the situation is that most of the crops now requiring protection from foreign pests are imported themselves, and could arguably be classified by an environmentalist as a foreign pest.

The other irony is that the countries that do have these diseases are also exporters and can produce the crop much cheaper than us.

The logical person would ask whether the potential costs from the pest or disease are greater than the benefits derived by consumers from cheaper food? If yes, then we should keep the quarantine restrictions. If no, we should drop them.

I am not trying to say here that all quarantine rules necessarily have greater benefits than there costs. But we have lost 3 out of ten cases brought against us by other WTO member, so if 30% of the quarantine rules can be dropped because their costs outweigh the benefits, that would be good for everyone in the long run.

Property industry propaganda knows no bounds (+market update)


The above video is from Bernard Salt's presentation at the 2011 Property Council of Australia's 'Geared for Growth' Congress recently held in Darwin. In the presentation he calls for the construction, property and banking sectors to combine forces to fund a lobby group to infiltrate social media, and blogs in particular, to counter the negative sentiment that is leading property markets into the doldrums.

Astonishing. As fellow blogger Tony Harris notes in his detailed analysis of the video -

Who are you really chatting with, when you post on that property forum or blog? A regular person like yourself, or a paid spruiker, funded by the real estate industry?

Around the 8 minute mark Salt discusses the hostile reception to an article he published online spruiking the virtues of growth (population growth I assume). He had this to say about the reader comments -

Not one person in 230 put a reasoned, balanced, measured counter-response. I want to see someone actually in there. Every time you don't respond, negative sentiment extends just that bit further across middle Australia. 

After pointing the finger at 'negative sentiment' as the cause of the current economic slowdown he goes on to suggest his solution (screenshot below quote) 

I want to see someone, somebody, some group of people, counter the negativism in all theatres, social media, twitter, the blogosphere, seek out and, not destroy, seek out and balance every extreme view - take the fight to them. Sitting back is not an option. I do understand that individuals cannot do this, but surely there is a way to fund a group to do it on your behalf. This it not a pitch for me, but I am surely happy to advise on how to set it up. 


What is ironic, to me, is that the property and construction industry lobby groups might actually go for Salt's big idea, as if a few blog comments and Facebook pokes can stop Australia following the rest of the world to its economic destiny.

Salt suggests perhaps they need an (another) 'independent' pro-growth, pro-development sentiment-generating lobby group which could be funded by the BCA, the Property Council of Australian and of all things, the Australian Bankers Association.

The banks would probably join because of the negative sentiment towards them at the moment. Salt comments -

The idea that banks should not get a fair return on their investment is bizarre. We've got this disconnect in Australia between the way we want to live, our superannuation, and our objection to every development, to anyone making a profit.

I for one can understand the concern over bank profits. After all, bank executives and shareholders seem happy to take the profits while taxpayers insure the losses. All the while they have played a key role in the property bubble with their declining lending standards.

Face it Bernard, you can't stop the realities of economics and finance by tweeting 140 characters or less.

And speaking of the realities of economics and finance, that national house price slide accelerated in July according to Rismark.  Note that in Perth and Brisbane prices have been falling for more than 12 months, so the falls from peak are much higher than these figures show.  From my reading of old data I could guess that Brisbane prices are down about 11% over 15months.


Coinciding with their press release was the most bizarre property analysis yet from Rismark data guru Chris Joye. Joye's analysis of late has been squarely aimed at providing evidence that current house prices are supported by 'economic fundamentals', including the once-off adjustment in interest rates, higher household incomes, and so on. 

This time he mightily proclaims to- 

... show that by indexing up median Australian dwelling prices by per capita disposable incomes and changes in borrowing capacity (as determined by mortgage rates) one can account for around 90 per cent of the rise in Australian housing costs over the last two and a half decades

Which I guess is a roundabout way of saying prices are 10% overvalued at most. Joye presents the following graph to demonstrate his result, but I can't help wondering why he chose 1986 as a start date. Had he chosen 1990 as the start date he could have shown that houses are undervalued according to his fundamentals, but had he chosen 1998 as his start date, his fundamentals would have only explained about 50% of the house price. Most bizarre.


As I have said before, yes lower interest rates and higher incomes do explain some of the growth, but only about 70% of today's prices.  There is also always the risk that incomes will fall as house prices fall, but always the chance that mortgage interest rates will drop to slow any accelerated price declines.  The downside risks are far greater than any upside potential in the housing market at the moment, and I do wonder why Chris seems so keen to give the impression that this is not the case.

In other housing news today, Leith van Onselen from the Macrobears superblog [just kidding guys ;-)] has explained in detail in this SMH article why the RBA appears to underplay the risks, and underestimate the size of, the bubble in the Australian housing market. Simply, they use a measure of average household income about 33% higher than actual household incomes. Who would have guessed that the average household disposable income was actually $74,360, and the median just $60,580 - not the $100,000+ used in the RBA's analysis? Not the RBA it seems. Oops.

Finally, I stumbled across this article (somewhat belatedly) arguing essentially that housing supply is driven by housing turnover, and is completely unrelated to price. This might come as a shock to the 'elastify the supply side' believers.  It is also odd that mostly valuers and honest property developers seem to be the few groups who argue this concept.

Let me give a few practical examples – First, imagine the construction of a residential unit block – the developer, because of cash flow or financier requirements, needs to sell a large proportion of the development “off-the-plan”.

Simply, until pre-completion sales are locked away nothing gets built. 

Second example - for house and land packages in new estates, buyers purchase the block of land first and arrange the construction afterwards. In either case there is no “build it and they will come”. It is the demand that sets the pace.

Which is what I have tried to say for some time, and said back in April like this -

The rate of land and housing supply is determined by the rate of sales of new stock (known as the absorption rate). It has nothing to do with the rate of development approvals or even the price level.

Monday, August 29, 2011

Tobin tax for Australia?


But I see offhand no other way to prevent financial transactions disguised as trade

In 1972, after the collapse of the Bretton Woods system (where currencies where pegged to the USD, which itself was backed by gold), economist James Tobin proposed a tax on the conversion of currencies. As he says - 

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets. (here)

A 1978 article where Tobin reflects on global monetary reform is here, and well worth a read. The relevance to Australia in 2011 is quite clear when he says -

National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exhcanges, without real hardship and without significant sacrifice of the objective of national economic policy with respect to employment, output and inflation.

While Tobin originally suggested that all countries cooperate to implement a standard tax rate, with revenues raised pooled centrally, the idea is equally valid for a single currency-issuing nation to tax conversions of its own currency.

The logic behind the tax is quite sound. An influx of foreign funds only provides domestic benefits when it backs real investment in productive enterprise. And investing in a real business takes time. As Canadian economist Rodney Schmidt noted in 1994

In two-thirds of all the outright forward and [currency] swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year

A currency exchange tax reduces the gains from short term currency trades, and for a single country, allows them to reduce distortionary taxes elsewhere in the economy leading to productivity benefits. It also means there is a strong incentive for national savings to be invested locally, and a cost to banks seeking offshore funding to support their capital requirements. It also provides local governments some degree of control over their economy, rather than being at the mercy of global conditions. These are all good things.

Of course, like any tax, the risk is that governments simply spend this extra revenue unproductively and do not reduce distortionary taxes elsewhere in the economy, which greatly reduces its potential benefits.

In 2009 Brazil implemented a similar financial transaction tax regime that applies to foreign investment in stocks and fixed-income securities at a rate of 2%. And it seemed to work -

Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

But only for a while. The chart below shows the Real regained its strength fairly quickly. 

(This is not to be confused with Brazil's former Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira, or CPMF, which was a transaction tax levied at 0.038% on all bank transactions from 1993 till the end of 2007) 

Of course the empirical macroeconomic problem arises once again here - would the Real have been even stronger if not for the tax? Who knows? My gut feeling is that because economic agents adapt very quickly to new taxes, their offsetting behaviour can greatly reduce the intended effect. 

Since that time, the global battle to devalue domestic currency has resulted in many calls to implement Tobin taxes, from the British Prime Minister to the French President, with all political leaders seeking input from the IMF. The IMF is now coming around to the idea (recently releasing this working paper), and with DSK's likely replacement Christine Lagarde being a fan (here), chances have improved that this tax will be supported globally.

There is even strong support from the economics profession, with1000 economists writing a letter in support of the idea earlier this year. A good summary of the breadth of support (and not) for such a tax is here. Even economists at the Australian Treasury are talking about it. 

The cynic in me says that such a tax is unlikely because those who benefit from fast and cheap currency exchange are those with the most money, while those who bear the burden of a high domestic currency are usually the workers in marginally competitive industries.

For Australia I see only upsides to this tax. A lower Australian dollar and reduced foreign investment will help to slowly rebalance our economy to become more diversified and stable again. While the Henry Tax Review overlooked this type of tax, at least we have a backdrop of tax reform to accompany a Tobin tax.

The outcome of this political battle with the global financial elite is anyone's guess.

Tuesday, August 23, 2011

Econompic - negative real interest rates encourage savings

The basic premise behind stimulatory monetary policy is that lower interest rates reduce the cost of debt, and decrease the returns to savings, encouraging present spending and maintaining asset values. But recent experience (particularly in the US) has shown that in a low (or negative) real interest rate environment, savings rates are climbing.


Jake over at Econompic has put forward a reason this might be the case. He argues that if an individual needs to save a certain amount for future consumption, for example someone who wishes to fund their retirement, a low interest rate means they need to SAVE MORE NOW to reach that point.

What surprises me is that Jake’s hypothesis is fairly consistent with Milton Friedman’s permanent income hypothesis, which asserts that people will try and smooth out their earnings over their lifetime (through savings decisions) to maintain a relatively constant level of expenditure. In Friedman’s model, a transitory income, like prize money, would not be spent all at once, but mostly saved and spent over the rest of one’s lifetime. While the reduced debt burden from low interest rates may been seen as temporary by some people and not greatly affect their spending, the reduced return on savings DEFINITELY means that smoothing out income for retirement requires greater levels of saving.

For example, if interest rates are 5%, someone might want to save $1million in order to earn $50,000 per year in returns on which to live during retirement. But if interest rates are 1%, that person needs to save $5million in order to earn $50,000 in returns to fund their retirement.

One might suggest that low interest rates mean that people who need to save will save more, and people who don’t, will save less. This might translate to quite a variation in saving patterns by age, with the soon to retire boomers increasing savings, with the young workers saving less.

The low interest rates and high savings rate correlation probably also has a lot to do with household repairing their balance sheets following massive losses on equities and housing (particularly in the US and the UK).

Over to Jake for the details (original post here).

Sunday, August 21, 2011

Economies of scale do not equal productivity

Only three things matter in the Australian economy - productivity (how much each person produces); employment (how many people are producing); and equality (how that output is shared). All the other random shrapnel of economic news that flies around is kind of irrelevant.

(c/o Andrew Charlton + must read article entitled The Economic Myths of Peter Costello here)

Productivity is the key to greater wealth, as an individual, a nation, and a world. Productivity is doing more with less. It is that simple. Unfortunately people often equate productivity with economies of scale and population growth, which leads to a poor understanding how economic growth really occurs.

If a farmer selectively breeds his crop so that the next generation of plants yield 5% more grain, with no further inputs required (no more water, fertiliser, harvesting time etc), then he has made a 5% productivity improvement. The output in terms of grain is 5% higher for the same inputs.

Productivity gains flow through the economy, allowing us to produce more goods over time. When other farmers follow this lead, we find that marginal land can now be used productively. We find that fewer people need to work in agriculture, because each farmer is producing more food. This frees up labour to be employed elsewhere in the economy, producing other goods to satisfy our desires.

Productivity gains normally come from two sources. The first is in the form of new inventions and innovations in the methods of production - a new engine design, a new breed of plant, a new manufacturing technique or a new material. Innovation in the methods of production is THE key driver of our prosperity.

A second way that productivity improves is through economies of scale. Even in the absence of new technology or innovation, we can produce more output with less input by specialisation of labour, and larger and more efficient capital equipment, to achieve economies of scale.

However, people often get the drivers of productivity confused. They believe economies of scale are the main driver, and innovation is some secondary consideration. But in fact, economies of scale are only sometimes productivity enhancing. Often there are diseconomies of scale, where there is a trade-off between the size of the economy, and the efficiency of the economy. This occurs when the marginal cost of production is higher than the average cost (which is bizarrely where economists believe production usually exists on the cost curve except in the case of a natural monopoly).

For example, urban water supply can initially be produced very cheaply with a network of local dams. However, once local water needs exceed this amount, another source must be found. In Brisbane and Melbourne, this source is desalinised sea water, which is far more costly than any other water. What this means is that the cost of the last batch of water from the desalination plant (the marginal cost) is far higher than the existing average cost of water to the city, which increases the average cost and makes all water more expensive. Businesses that use water will pay more, and that leaves them less able to increase production and invest in their own innovative capital. Households pay more for water, leaving them less income to spend on other goods. We are all worse off, and far less productive, due to this diseconomy of scale in water supply.

There are many other examples from roads, to electricity, to housing.

Another popular view is that there is a connection between the population of a city or country, economies of scale, and productivity - if we don’t have more people, we can’t get the economies of scale necessary to become more productive.

Yet the great problem with this view is that economies of scale do not rely on the population of the geographical area where goods are produced, but on the size of the market being satisfied by that production. This is why German car manufactures in a single Länder (state), with a population of perhaps 10 million, can achieve greater economies of scale than many other manufactures because they supply a global market with a high volume of vehicles. More people in these Länders will do nothing to make these auto firms more productive, and may likely achieve the opposite effect if the required expansion of the housing stock, roads and other infrastructure, competes for labour demand and finance with the car manufactures.

Even if population growth means that expansion of some of our capital stock occurs where economies of scale exist, there is always the need to expand the housing stock – a capital good where economies of scale do not readily exist. Duplicating any capital in this nature comes at a cost to society that can never be recovered. Read more on that here.

The below Venn diagram shows the relationship between these factors and productivity. As you can see, innovation in new production technology is the primary driver, with economies of scale sometime being beneficial for productivity, and population growth usually coming at a cost to productivity.

The implication then is for government especially to be aware of when expansion of publicly funded capital is approaching diseconomies of scale and recognise this cost to society. Why stimulate population growth when it comes at a cost to the existing population in the form of more expensive water, transport, and the diversion of resources from genuine productive investment?

Monday, August 8, 2011

Chart of the day: Shares v houses

I have noted before at this blog that comparing share prices and house prices is a terrible way to examine the real differences in returns in these two markets. My key arguments are:

1. The share market is and equity market, and to compare like with like you would need to subtract the debt against housing to compare the volatility of equity.

2. The negatively geared investor usually sets the market price (they are the marginal buyer). That means they are losing money each year on the house, so a certain degree of price growth is necessary to break even.

3. The cost of home ownership is high, as are the transaction costs. In one trade of a home you would need to make an additional 10% return compared to a share trade.

So today I note again that an incomplete comparison has been undertaken by a prominent property analyst. The general finding is clear.  There is no doubt that property (in Sydney and Melbourne at least) has outperformed the share market over the past four years. But I thought is wise to add some modifications to compare like with like.

The original graph is below.

Again, the problem is that this graph fails to consider returns, and in particular, comparing the position of a negatively geared property investor. So I made my own comparison of the house price and ASX200, along with my own housing equity accumulation index taking into consideration the negative returns (and tax breaks at the highest marginal rate), compared to the ASX accumulation index. I also added the returns to cash at 5.5% average over the period (a bit of a guess at the average term deposit rate), and an accumulation index for residential property bought with cash (click for larger image).


As you can see, when you consider the higher annual positive returns on shares, the losses are not a severe as the price index would make out. For housing bought with cash, the accumulation index shows the same effect of increasing returns, but to a lesser degree due to the lower net rent compared with dividends in the ASX200.

What stands out is the tremendously better position the leveraged housing investor is in if they bought a home in 2007 with a 20% deposit (and capital growth similar to the index – this is not the case in Brisbane and Perth). This investor would have made over 80% on their equity in 4 years due to capital growth alone. This is especially impressive since the annual cost of ownership is 9% of their equity. (As a side note, the high transaction costs in property mean that to convert that return to cash will cost in the order of 3.5% on the purchase price, and 3% of the sale price, or 36% of the original equity, giving a 'sold up' return of 46% return on equity of over the period- still VERY impressive.)

However, there are important things to note. First, leveraging works both ways. The leveraged accumulation index fell for 3 months longer in 2008, and for a house price drop of just 4.9%, the index fell by 27.5%. Also, at the April 2009 trough, although the house price was still 4.1% higher than when they bought in June 2007, their equity was only 3.7% higher.

This is particularly important to note during the current falling trend in house prices, which has so far amounted to just 2%. The leveraged investor has already lost 9.6%, and every extra percent decline leads to a 5% decline in this index (and more still for a similarly leveraged investor who bought during 2010 or 2011).

Given these leverage considerations, the question of whether housing investment is a way to soften the downside from your investment portfolio is not so clear cut. For someone with plenty of cash looking for a home, perhaps a cash purchase of a well located home with potential to add value is an option. Of course, you need to expect some early losses in value, and low returns, but when the alternatives are looking quite bleak, there might be no harm. I would be waiting a couple of years to buy in Sydney and Melbourne, but perhaps sooner in Brisbane and Perth where prices have already fallen substantially.

Of course, in the mean time, anything could happen. Please don't take this as investment advice.

One final question for readers. If Australia is headed the way of the US, with negative real returns to bank deposits, and housing market that will seemingly not find a bottom, will we see a surge in the share market simply due to lack of other options to invest locally? Perhaps the bottom of the share market will be in later this year and some good value can be found.

*note to readers, the CBA cut its fixed rate mortgage rate this morning. Next interest move is down.

Tuesday, August 2, 2011

Current account deficits and house prices

As I alluded to in recent posts, Australian banks reliance on foreign funding has lead to the alarming situation whereby we (as a nation of households) have borrowed from the rest of the world to buy existing houses from each other at inflated prices. As I said, “it makes me quite frustrated to even suggest that a fair portion of foreign debt incurred in the past decade was used to pay each other higher prices for existing houses”.

I made that claim without evidence – it was an intuitive interpretation of the data in the balance of payments and in particular, the interest payments heading abroad in the primary income account. But, in the interests of an informed debate, I have digested some of the literature on this matter and found that the intuitive principle is well supported.

In February this year, Andrea Ferrero, of the Federal Reserve Bank of New York, published this paper arguing that “a progressive relaxation of borrowing constraints can generate a strong negative correlation between house prices and the current account. Households increase their leverage borrowing from the rest of the world so that the current account turns negative”.

The following plot is from the paper (p2).

The model demonstrates the mechanism by which relaxed lending standards decreases domestic saving, increases foreign bowings and decreases the current account. The model also shows that prices vastly overshoot the new equilibrium point. The quote below is from p14 (my emphasis).

The key shock that generates a house price boom and a contemporaneous current account deficit in the model below is a reduction in the parameter that measures the loan-to-value requirement. At a broad level, lower collateral requirements capture easier access to credit for housing finance.
...
The main experiment consists of shocking the collateral constraint parameter. In particular, financial innovation corresponds to a higher loan-to-value ratio.
...
At a very basic level, the model captures the negative correlation between house prices and current account balance. In response to the shock [relaxation of collateral criteria], house prices persistently increase while the current account worsens, at least for a couple of periods, before slightly overshooting its long run average of zero. A more realistic sequence of shocks approximating a progressive relaxation of collateral constraints (the process of financial liberalization) is likely to generate a run-up of house prices and a deterioration of the external balance more in line with what observed in the data.

This appears to support the idea that simply constraining lending criteria would have been an effective measure to contain house prices, and reduce the current account deficit. Steve Keen would not be surprised.

Indeed, the evidence of this relationship appears quite strong, and it is easy enough to find other articles supporting this argument empirically.

My main criticism is the timing of the house price growth measure. China for example appears to have flat real price growth in the above graph for the period 2001-2006. That would seem consistent with the arguments surrounding the relationship between the current account and house prices. However, since that time credit standards in China were reduced, prices shot up (around 2007), then access to credit was subsequently tightened, and prices flattened (around 2008). To me, a good experiment to demonstrate this relationship, although hampered by global conditions at the time. The below graph from The Economist house price comparison tool shows China’s house price growth in this period was far below that of the US, UK and Australia. More recent data shows strong house price growth since 2009.

One stand out example of where the relationship  between house prices and the current account fails is Japan in the 1980s.  A housing bubble coupled with a current account surplus and a large growth in ownership of foreign assets is not what these models predict. 

Out of interest, here is a list of countries according to their current account balance. Eyeballing this list it is pretty easy to find the prominent housing bubble markets near the bottom.

To be clear, the access to credit is the key (and this may provide the explaination of the Japanese experience in the 1980s). Lower LVRs force domestic saving and limit the need for foreign borrowing, meaning asset prices can reflect the economic reality of that country alone. (One might argue that Japanese saving was high enough that the current account was simply lower tha it woul dhave otherwise been, but not negative.)

I will present one final conclusion from here, with my emphasis.

We find robust and strong positive association between current account deficits and the appreciation of the real estate prices/(GDP deflator).

Our results are consistent with the notion that for all countries, current account deficits are associated with sizeable appreciation of the real estate. This effect holds controlling for the real interest rate, GDP growth, inflation, and other conditioning variables. We also find evidence consistent with the growing globalization of national real estate markets. These findings are consistent with various scenarios explaining patterns of capital flows across countries, including differential productivity trends and varying saving patterns. In the absence of pre-existing distortions, financial inflows are unambiguously welfare improving. Yet, in a second-best environment, public finance considerations imply that inflows of capital may magnify distorted activities, increasing thereby the ultimate costs of these distortions. Arguable, the experience of emerging markets in the aftermath of financial liberalization during the 1990s illustrated these concerns. Needless to say, this second-best assertion is not as argument against financial integration, but a cautionary tale – greater financial globalization implies the need to be more asserting in dealing with moral hazard and other pre-existing domestic conditions. (p20)

What sovereign wealth? Continued...

To the cynic, the RBA’s role is to assure citizens that they have everything under control. In this light, we can see the recent speech delivered by Guy Debelle, the Assistant Governor, where he defends a persistent current account deficit. While he shows that much of the deficit has historically been the results of Australian banks seeking funding abroad (an inflow in the capital account), only to send interest payments back annually (an outflow in the current account), he artfully avoids the distasteful conclusion that we have gone into debt with the rest of the world to sell houses to each other at inflated prices.

Indeed his speech is a critique of the reasonable conclusion that “the Australian banking sector is ‘funding the current account’." The balance of payments accounting identity, where the sum of the capital account and the current account should equal zero, appears to demonstrate this is true. If banks did not seek offshore funding, they wouldn't pay interest on these funds, and the current account would more closely reflect the balance of trade (which is much less negative).

The graph below shows that capital account flows since 1990. To translate, this account reflects the sum of our sale of assets to foreign ownership and our international debts incurred (inflows of funds), which is balance by outlfows of funds in the current account.


With the RBA’s view of the economic landscape in the back of our mind, I thought it worthwhile to repost the Wildebeest blog explaining why a sovereign wealth fund in this environment is simply funded by debts in the rest of the economy.
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Should Australia have a sovereign wealth fund (SWF)? Whenever I hear this discussed my first thought is what do you mean by sovereign wealth? The Australian government can set aside a pool of funds at any time and call it whatever it wants. For example the “Future Fund” is listed in wikipedia as being an Australian sovereign wealth fund. The discussion in recent times seems to be linked to the once in a generation mining boom. Mining by definition extracts a non-renewable resource, so at a time when windfall profits are being made in mining, due to the demand from China, people understandably feel that some portion of that money should be set aside for the future. But does Australia actually have “sovereign wealth” from which a SWF can be funded?

There is a national accounting identity:

CA = (T – G) + (S – I)

This says that taxes, T, minus government spending, G, plus private savings, S, minus private investment, I, must equal the current account CA. If (T - G) is positive then the government is running a surplus, if it is negative a deficit. (S - I) can be thought of as the net private sector savings. If it is positive then wealth is being accumulated. This accounting identity is what it is independent of ideology or political beliefs: the identity is the same whether you are progressive or conservative, or regardless what brand of economic belief system you subscribe to.

If the government sets up a SWF it could be funded from existing money:

CA = SWF + (T – SWF – G) + (S – I)

or it could be funded by raising taxes

CA = SWF + (T – G) + (S – SWF – I)

Australia has been running current account deficits for ever and a day.


So the left hand side of the equation is negative, has been negative for a long time, and is likely to be negative for a long time. By definition the right hand side must equal the left hand side so must be negative. Now imagine that the government was to “quarantine” money in an investment fund which, we'll call a SWF. Prior to the formation of a SWF we know that (T – G) + (S – I) is a negative number. In order to create the SWF the net government and private sector balances have decreased by an amount equal to SWF:

(T – G) + (S – I) – SWF

If follows that while Australia runs a current account deficit, if money were to be placed in an investment fund by the government the rest of the government and private sector would be further indebted by an amount equal to the SWF. In such circumstances a sovereign wealth fund would be an inappropriate name since the fund would in fact be funded by driving the rest of the economy further into debt.

Contrast this with Norway which runs current account surpluses from which it follows that (T – G) + (S – I) is a positive number. As long as their SWF does not exceed the current account surplus, then money can be set aside while still leaving the net government and private sectors in surplus. Norway is accumulating sovereign wealth and is able to set aside this wealth in a SWF without making its economy indebted. Australia on the other hand, by running current account deficits is not accumulating sovereign wealth. While one sector of the economy, mining, may be doing very well, as a nation you have to ask “what sovereign wealth?” If an investment fund was created it would be from money which drives the remainder of the economy further into debt. Perhaps “sovereign debt fund”, SDF, would be a better description of such a fund. Creation of a SDF would have a negative effect on GDP growth.

This analysis of the national accounts also ties in to discussions about balanced budgets. We can see that if T – G = 0, i.e. the government balances its budget, then the private sector must carry the debt burden arising from the current account deficits. This presumably hasn't occurred to politicians from either persuasion who thump the table about the need for the budget to be balanced, or even worse for the budget to go into surplus. A balanced budget in these circumstances of endless current account deficits is likely to hamper GDP growth.

However should it be decided, for whatever reason, political or ideological, that Australia needs to run a sovereign investment fund, or needs to balance its budget, then the national discussion would be better off focussing on the structural reasons for continued current account deficits, since mandating a balanced government budget merely shifts the debt burden to the private sector rather than addressing the source or cause of the debt.

On the other hand the purpose of this article is not to make a case for or against current account deficits, but to note that if they exist it follows that an equivalent deficit must exist among the private and government sectors.

In summary while Australia is experiencing a mining boom it doesn't have sovereign wealth in the same sense as other countries that run successful sovereign wealth funds. So to the question of whether or not Australia should have a sovereign wealth fund I say “what sovereign wealth?”

Monday, August 1, 2011

What sovereign wealth?

Glenn Stevens recently noted that Australian households grew their consumption faster than their incomes from the mid 1990s till 2006 and that this wasn’t particularly sustainable. He produced the below chart.

As a nation we have consumed more than we have produced in 52 out of the last 53 years, and as the chart below shows, the growth in imports has far outweighed the growth in exports over the past decade. Is that sustainable? (note the chart is a chain volume measure and the $ values are not representative of the current price value of exports and imports)

*As a side note, the country is made up of its households and businesses so we would expect the country aggregate situation to be similar to households in aggregate.

As a backdrop to this situation, the Australian economy is in debt to the rest of the world, with a debt balance that continues to grow due to our persistent current account deficits (graphs below).

This background is an important consideration for policy makers listening to calls for Australia to establish a sovereign wealth fund (SWF) with revenue generated from a resource rent tax (let’s put aside the political debate for a moment).

Blogger Wildebeest has explained that in these macroeconomic conditions, a sovereign wealth fund is necessarily comprised of public and private debt. To use an analogy of the household, Australia would be investing in foreign markets by mortgaging the house – borrowing from foreigners to invest in foreign economies. We don’t actually have any sovereign wealth to speak of, unlike other countries where such funds operate (such as Norway and Saudi Arabia – see chart below comparing the current accounts of a selection of countries).
Even if as a nation we produced more than we consumed to actually generate sovereign wealth, there is a strong argument that we should use the income to continue to invest in our own economy, not in the economies of others. There is also an argument that a fund that simply chases short term returns abroad is not being used in the best long term interests of the country.

When some people talk about a sovereign wealth fund, as I have in the past, it usually goes hand-in-hand with some kind of tax regime to equalise the two speed economy – resources vs services and manufacturing. But these issues should be separated. By all means, if the people decide that fiscal policy should be used to ‘balance out’ the economy, then I see no reason not to. But whether the revenues from some kind of ‘equalising taxation’ should be invested abroad to protect the exchange rate is another question entirely.

I will expand these arguments surrounding optimal investment of surpluses in another post. Today, I want to explore in more detail why Australia, blessed with a massive capacity for agricultural production and plentiful mineral and energy resources, has consumed more that it has produced since WWII.

No doubt we are all aware that the terms of trade measure, the ratio of prices of exported goods to imported goods, is at an all time high. But terms of trade calculations tell us nothing about the volume of the countries' exports, and the net financial position.
A better measure of the international performance of a country is the current account, which considers volume, price and ‘non-traded’ financial transactions include ownership of foreign assets. A deficit in the current account occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.

Australia has run a current account deficit every year since ABS records start in 1959, except the 1972/73 financial year. Indeed, Australia economic growth in light of the persistent deficits has lead to the Pitchford Thesis, which contends that after the floating of the exchange rate the current account deficit was the residual outcome of rational optimizing decisions of private agents ...[therefore] the policy of targeting the reduction of the current account deficit... was misconceived.

Whether this is a logical position is a debate for another time.

So let us take a look at the data to see exactly why Australia’s current account is persistently in the red.

First, the chart below shows the monthly balance of trade in goods and services in current dollars. Notice that it is rare for us to even export a higher value of goods and services than we import, happening just 4 out of the last 32 years. As the second chart above showed, with the recent trends of import volumes growing faster than export volumes it will get even more difficult to maintain a trade surplus if the terms of trade return to historical norms.


Next, we explore the capital and financial accounts, which measure changes in ownership of financial and non-financial assets, capital transfers, and transactions between residents and non residents. In particular, the account known as primary income, and the part of this account called investment income, is the key to understanding the current account. The ABS gives the following definitions -

The primary income account shows primary income flows between resident and non-resident institutional units. The international accounts distinguish the following types of primary income: compensation of employees; dividends; reinvested earnings; interest; investment income attributable to policy holders in insurance, standardized guarantees, and pension funds; rent; and taxes and subsidies on products and production 

Investment income is income generated by financial assets. This includes dividends paid on direct and portfolio equity investments and interest paid on debt securities and other debt instruments.

The investment income category shows that $21billion of investment revenue is heading out of the country each quarter (ABS Cat 5302.021 column D). Important observations include the $4billion of income from shares and $7.6billion in interest generated (down from a peak of $8.4billion in 2007) leaving our shores last quarter. On the other side of the ledger, $3.5billion in income from shares and just $277million of interest entered Australia from abroad.

The graph below shows the balance of these two items alone (which comprise about 50% investment income). By my reasoning this means that foreigners are buying up more assets - property (the media has taken note of this in agriculture) and shares - and lending more to local households and businesses over time.

On primary income alone, Australia was $50billion in the red this past year. It takes a lot of trade in agricultural and mining products to offset this transfer of financial assets, and our best effort was a peak of $23.3billion of net exports of goods and services over the past 12 months with an all time high terms of trade (noting that even the balance of trade is usually negative).

So not only do we usually import more than we export, we sell more domestic assets than we buy foreign assets, and the incomes from the transfer of assets to foreign ownership far outweigh the value of the actual trade of goods and services.

A quick example.  The government owned business Telstra was privatised, and 25% of the company is now foreign owned.  That purchase by foreigners was a transfer of assets to foreign ownership as part of the capital accounts, and the dividends earned on the foreign owned portion now leave the country as part of the deficit in the primary income balance of the current account.  The same applies to foreign purchases of agricultural properties, mining shares, and lending to Australian businesses.

For the past 50 years is seems that Australia has been selling off its bountiful natural assets, and going into debt to the rest of the world. It makes me quite frustrated to even suggest that a fair portion of foreign debt incurred in the past decade was used to pay each other higher prices for existing houses, doing nothing to improve our productivity as a nation.

In a later post I will consider the Pitchford Thesis and policy remedies in more detail, including the role of the Foreign Investment Review Board.

Sunday, July 31, 2011

RBA pragmatism and global stagflation

Since the higher than expected CPI print last Wednesday, the economic blogosphere has flooded our screens with opinions on the likely RBA decision at its board meeting tomorrow. Some have argued that the CPI was filled with ‘once-off’ movements in price (eg, the deposit and loan facilities and some fruits) and should therefore be taken with a grain of salt. Others have argued that the CPI is clear evidence that the RBA should move on interest rates to get ahead of the inflation curve.

I have a different opinion.

Raising the cash rate while Australia could be in a technical recession is a situation the RBA needs to avoid more than anything else. Think about the criticisms – “How could our central bank be so out of touch?” “Give Glenn the boot!” The very institution itself would be at risk. Forget demonstrating independence. Self preservation is the name of the game (note also that the inflation target is not a mandate of the RBA, but its own interpretation of how to fulfil is statutory role).

Therefore, the only logical decision for the RBA board tomorrow is to leave the cash rate unchanged, even if it has strong concerns about inflation. It is the same action central banks are taking in the UK and other developed countries in similar situations.

But there is more to this story. The present bout of high inflation and low growth is global, and there is little our domestic policy can do to intervene. Further, I suspect that this has much to do with physical constraints to global oil supply (at least in the short term).

As I said two years ago during the financial crisis –

...some interesting trends should occur in the next year or two. First, we should see the price of oil rise again from its current price of around $60 a barrel. Second, we should see an increase in the inflation rate on a relatively global scale. (Note that in the UK, inflation is currently at 4.4%. With the base interest rate at 4.5%, the real interest rate is now effectively zero). Third, we will see a sustained decline in global output. Taken together, a recipe for stagflation. (I also predict continued volatility on financial markets as demand and supply expectations feed back on each other).

The following three graphs show the oil production, oil price and the correlation between oil price and inflation in Australian, Asia, and other developed markets (DM). (Thanks Ricardian Ambivalence for the third graph).


The simple explanation for oil price led inflation is that a century of capital equipment, particularly in transport, is reliant on oil, has very little ability to substitute to other energy sources.  Therefore, the cost of goods is at the mercy of the oil price due to our invested capital.

Typically, there is an expectation oil production will respond to higher prices. But if there are short term physical and technological limitations, this cannot occur. In 2007 the oil price was double the price in 2005, yet total global oil production was identical. If there was not a physical limit to oil production, oil producers should have responded to this price by greatly increasing supply.

Ricardian Ambivalence has weighed in with an opinion that global inflation is not about oil. Oil price leading inflation globally in the above graph is explained away because “Oil leads CPI, in part, because variations in demand lead variations in CPI”. There may be some element of demand and oil price as co-contributors to price volatility, but my suspicion is that physical production limits to oil are the key.

Indeed, the reason these limits are having such a dramatic effect is because they were not foreseen, and investment decisions were made on the expectation of higher volumes of oil available at similar prices.

As a final statement, I want to address the ‘lunacy’ of peak oil. Many economic thinkers rule out the possibility of such an occurrence, as high prices lead to more inaccessible reserves becoming viable, as well as substitute energy sources becoming economical. Yet the recent evidence is that global oil production is back where it was in the late 1990s even though the oil price is more than 5x higher. This doesn’t seem consistent with the economic rationalism, which ignores the major prolonged adjustments necessary for these investments and subsitutions to occur.

Some may still be arguing in their mind that the reason for lower oil production currently is because of a global demand slump. But again, this fails to explain why we are willing to pay 5x the price for oil, and producers are not willing to sell any more oil at that price.

In the end, Australia is at the mercy of global forces as much as anyone, and it would be foolish for the RBA to believe that our domestic interest rate will have any significant effect on inflation without crushing our economy.

Wednesday, July 27, 2011

The housing market's 'once-off adjustment' meme

There is a meme floating around which has its origins in Chris Joye's numerous articles on the Australian housing market. While I often challenge Joye's economic arguments on this blog, I hope that readers realise this is simply part of a rigorous intellectual debate, and not a personal attack. Indeed, I admire his quest to provide better housing data, and agree with quite a few of his economic and political beliefs.

The meme is that the surge in debt levels and the price of Australian homes since the late 1990s was a once off adjustment to a period of low interest rates and inflation. Therefore, if these conditions hold, current prices are sustainable.

RBA Governor Glenn Stevens mentioned this 'once-off' adjustment in his recent speech 
The period from the early 1990s to the mid 2000s was characterised by a drawn-out, but one-time, adjustment to a set of powerful forces. Households started the period with relatively little leverage, in large part a legacy of the effect of very high nominal interest rates in the long period of high inflation. But then, inflation and interest rates came down to generational lows. Financial liberalisation and innovation increased the availability of credit. And reasonably stable economic conditions – part of the so-called ‘great moderation’ internationally – made a certain higher degree of leverage seem safe. The result was a lengthy period of rising household leverage, rising housing prices, high levels of confidence, a strong sense of generally rising prosperity, declining saving from current income and strong growth in consumption. (here
Chris Joye recently reiterated the argument here
This was a once-off "level-effect" (ie, sustainable adjustment reflecting the huge reduction in the cost of debt), not a permanent growth effect, and now these ratios are flat-lining. This is why the household debt-to-disposable income ratio, as shown below, has gone sideways since 2005, years before the GFC first materialised. That is, credit has been tracking incomes, as you would expect.
The household debt to disposable income graph is below, as is a graph demonstrating the structural adjustment of interest rates.

What makes this meme powerful is its truth. Australian interest rates did see a structural adjustment in the mid 1990s. There is also no denying that lower interest rates should lead to asset values rising relative to other prices in the economy. It also makes sense that the level of debt able to be sustainably managed, as a portion of incomes, is greater.

In the housing context, the 'once-off adjustment' argument can be demonstrated as follows.

Prior to the structural adjustment in interest rates, a buyer looking to buy a home that rents for $15,000pa, who is willing to pay a 20% over the cost of renting to buy the home, would capitalise $18,000 at the going rate of 12.8%. That's a price of $140,625. After a structural adjustment, the cost would be capitalised at 7.3%, giving a price of $246,575. A 75% real price increase should be as sustainable as the previous price (almost).

The same calculation can be made against household income, where for a fixed percentage of incomes, a 75% greater price, and level of debt, can be sustained.

Unfortunately, this logical argument only accounts for a part of the debt build up and house price growth since the mid 1990s. The RBA graphs of household finances and real house prices (below) show clearly why this is the case.




The graph of interest paid as a proportion of disposable income shows that the actual cost of debt relative to incomes has doubled (4% to 8%) since the mid 1990s. This is clear evidence that much of the debt binge, and the subsequent house price inflation, is not attributable to the 'once-off adjustment'. This adjustment would only account for the amount of debt, and home prices, that could be supported with interest costs of 4-5% of household incomes - not 8%.

The RBA also shows that real home prices have more than doubled (100% growth) since the mid 1990s to 2007, rather than seeing 75% real gains. Indeed the 2009 boom saw real home prices inch up again (with some subsequent falls in real terms).

The ABS home price figures (though not ideal for this purpose) suggest that real home prices gained approximately 150% since 1996. That's twice what is expected from interest rate conditions alone.

To get back to that 'sustainable' point, either home prices need to fall by around 30%, or interest rates need to fall by 30% (mortgage rates to 4-5%), or some combination of the two (noting also the geographical disparity any correction is likely to have). With today's CPI print surprising many on the high side, the market prediction (and mine) of rate cuts by year's end seems far less likely.  The negatively geared housing investor should take note.  

In all, the meme is powerful because it is true, but dangerous because alone it is an incomplete explanation of debt and home price trends of the past two decades. What appears clear from the data is that we have overshot the expected price and debt adjustment due to the changing interest rate environment. With this in mind, the downside risks for property values appear to far outweigh any upside potential.

Monday, July 25, 2011

Is Australia a net food importer?

Measuring food is difficult. Do we use kilograms, or calories?

I’ve covered the value of food security before.  But the obvious truth that Australia is a massive exporter of food, in terms of both kilograms and calories, does not stand in the way of the grocery lobby group, the Australian Food and Grocery Council (and yes, I am very late to this story).

Here are some examples
This alarming result shows food and grocery manufacturing – which employs 288,000 people – is now a net-importer of food and grocery products which impacts industry’s growth and competitiveness (here)
But Ross Gittins' b%&*$it detector was straight on to it
According to figures compiled by the Department of Foreign Affairs and Trade, last year we had total exports of food of $25.4 billion and total food imports of $11 billion, leaving us with a surplus of $14.4 billion. Even if we ignore unprocessed and look only at processed food, we still had a trade surplus of $5.8 billion. (here)
He continues to pick apart the claims.
So how did the food and grocery council get exports of $21.5 billion and imports of $23.3 billion for 2009-10, giving that deficit of $1.8 billion? By using its own definition of ''food and groceries''. We're not talking about farmers here, but the people who take their produce and process it for supermarkets.

So the council's figures exclude all our unprocessed food exports, including wheat (worth $4.8 billion in 2009), other grains and live animals. On the other hand, they include ''grocery manufacturing products'' such as medicines and pharmaceuticals, plastic bags and film, paper products and detergents.

That's food? It turns out that our exports of ''groceries'' totalled $4.9 billion in 2009-10, whereas our imports totalled $12.9 billion, leaving us a ''grocery'' trade deficit of $8 billion. This is hardly surprising. Since when was Australia big in the manufacture of medicines? If you leave out groceries, the report's figures show we had exports of processed food and beverages worth $15.9 billion, compared with imports of $9.9 billion, plus exports of fresh produce worth $700 million against imports of less than $500 million.

That leaves us with a trade surplus of $6.2 billion for fresh and processed food and beverages. We've been conned.
This all leads me back to the arguments I made about the value of food security. If food security is important, why isn’t computer security, or medicine security, or car-making security, or plane-making security, or any other "fundamental economic ingredient" security given the same attention? Indeed, we could not produce the amount of food we currently do without imported picking, packing and transport equipment, so unless we secure those, we won’t even have food security.

The graph below is a final reminder about our food net export position relative to other nations, and our relatively low direct agricultural subsidies.

Thursday, July 21, 2011

Real per capita wealth trend

As part of my recent habit of examining trends from the perspective of the individual, or household, I have compiled a measure of real net wealth per capita.

The reason for this is to add another perspective to the more general question of how the Australian economy has fared post-GFC.

As you can see, the average Australian's real net wealth is exactly where it was at the end of 2006.  Have we really spent four and a half years just treading water?

The interesting relationship is between the trend in real wealth and the trend in retail turnover.  The 2007 peak of per capita wealth also happened to be the end of the growth trend in retail spending.  It is also important to note that in the last decade, home values have comprised around 60% of total household assets, which leads on to conclude that the fate of retail rests heavily on the fate of home prices.